Saturday, January 07, 2006

IMHO: Getting What We Asked For

I was on the phone late last Thursday afternoon with the folks at IBM just before they made their big announcement about changes to their retirement programs. That timing was highly coincidental – and more than a bit ironic, since one of the things I had called to chat with them about was the impact of their last big retirement plan changes, which they unveiled almost exactly a year ago this week. This time, they announced the freezing of their current pension plans and a significant enhancement of the matching formulas for what they now term their 401(k) Plus plan – changes that would not, however, be effective until 2008 – and changes that would not apply to current retirees (see IBM Beefs Up 401(k), Backs Off DB – Come 2008).

A lot has happened in the past year on the pension front, and yet nothing that really needed to happen. We’re still dealing with a “temporary” replacement for the 30-year Treasury bond in pension calculations (even though the Treasury plans to begin reissuing them this year) and, despite repeated legislative forays on the topic, we still don’t have anything resolved on that front (maybe this year). Unfortunately, the legislative forays seem designed more to try and prop up the financial integrity of the nation’s private pension plan insurer (the Pension Benefit Guaranty Corporation) than to, in any substantive way, promote the adoption of new offerings by employers. Also unfortunately, some of the reform measures to that end (not the least of which is a huge increase in the premiums paid into that system) seem at least as likely to winnow the existing field as anything else, and most likely to run off plans that are well-tended rather than those who are in danger of shucking those obligations onto the PBGC. Worse, the Senate’s version still, IMHO, affords a sweetheart deal for the troubled airline industry.

Despite this morass, most pension plan sponsors have resolutely buckled down and tried to make the best of a troubling situation – digging deep to make contributions, and managing their way towards returns that are well in excess of assumptions that the mass media was so incredulous over just a short time ago. Those efforts, in combination with a modest uptick in interest rates, have allowed most to make serious dents in their pension funding gaps.

Nonetheless, there is a palpable sense that the time for traditional pension plans is past, certainly in the private sector. Not so much because of the unstable economic, accounting, and regulatory environment – though all certainly have played a role in the demise. Not even because employers are no longer willing to shoulder the accounting and financial burdens associated with these programs – though one could hardly fault them for exasperation on that front (see “IMHO: Broken Promises”).

Ultimately, I think the thing that is putting the nail in the coffin of these programs is worker antipathy. Let’s face it, we don’t work for the same employer all our lives anymore, and as a result, we don’t value a benefit that is effectively predicated on that assumption. Ultimately, we have a benefit that is expensive and unwieldy for employers to offer, and one that workers neither seem to appreciate nor demand. Recent pressures from accountants and lawmakers have certainly added fuel to the fire – and there’s every indication that the “threat” of pension reform is accelerating the rush to the exits.

This is a disquieting trend – particularly for those of us weaned on the premise of the three-legged stool of retirement security. We often caution workers on the dangers of putting all their eggs in one basket – and yet current developments seem destined to create an environment where our retirement incomes will largely, if not solely, be a function of people’s inclination to save for themselves.

Shifts like that at IBM will be seen by many as a sign of the times – an indication of future trends, a model likely to be replicated by others. To me, it seems more a natural and perhaps necessary response to the priorities we – workers, employers, lawmakers - have all assigned retirement security. Quite simply, we are getting what we asked for. It just may not be what we deserve.

- Nevin Adams

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